How Your Health Insurance Premiums are Calculated — How To Lower Them

The more you understand what goes into setting your company’s health insurance premiums, the better prepared you’ll be to control insurance costs for you and your employees.

For an insurance company to be successful, it has to charge a premium that covers its expenses and losses and provides a profit. In the past, health insurance companies would determine how much to charge for health insurance by reviewing current and past health histories, age, occupation and gender. This is called underwriting. In the small group market, insurers might review the health history of every individual in the group. In the large group market, instead of examining every individual in the group, an underwriter would look at the makeup of the group as a whole—is it predominantly older or younger, female or male? What are their occupations? And most importantly, what is the claims history of the group?

What the Affordable Care Act Allows

The Affordable Care Act (ACA) in 2014 changed the way insurance companies set premium rates for small groups. Groups with 50 or fewer employees are not required to buy insurance for their employees, but they may. Employers with 51-100 employees fall under the ACA’s “pay or play” provisions and must buy coverage.

For these groups, the insurance companies can no longer underwrite the policy; they can only adjust premiums to reflect whether the:

Plan is for employee-only coverage, employee plus spouse or family.

Geographical area has higher medical costs than other areas.

Insured individual is young or old, although the ACA limits insurance companies to charging an older adult no more than 3 times the rate of a younger person.

Insured uses tobacco, although the ACA limits insurance companies to charging no more than 1.5 times the non-tobacco user’s rate.

The company chooses a Bronze, Silver, Gold, Platinum or catastrophic plan, with Bronze being the least expensive. All small group plans, whether from the Marketplace or not, fall into one of these four categories and must cover the “minimum essential health benefits.”

Remember that states are allowed to set higher, more stringent standards than the minimum set by the ACA. In addition, the ACA permits employers that have health plans to charge employees 30 percent more on their premiums if they refuse to participate in a wellness program or meet specified health goals.

Ways to Lower Costs

According to the Bureau of Labor Statistics, only 57 percent of workers at companies with 100 employees or fewer have access to employer-sponsored health insurance. A survey by the Bank of America also shows that 72 percent of small-business owners said they are concerned about health insurance costs.

Fortunately, if you want to offer coverage or your renewal is higher than you expected, you have options:

Shop around. The Kaiser Family Foundation says that only 57 percent of small businesses get bids for other plans. Premium rates can vary dramatically from plan to plan.

Consider the SHOP Exchange. You can still use the services of a broker and purchase coverage through the SHOP government-facilitated exchange. Employers with 25 or fewer employees may qualify for a credit with the potential to save up to 50 percent.

If you have fewer than 50 employees, the ACA does not require you to provide coverage. You can discontinue group health coverage and refer employees to the Marketplace, where they might qualify for subsidies. However, consider how that might affect your ability to compete for qualified employees.

Partner with a direct primary care provider. They charge a monthly fee for unrestricted health care. While costs are low, this type of care does not cover catastrophic illnesses, such as cancer. This coverage can be combined with a high-deductible health insurance plan to cover serious illnesses.

Health care-sharing ministries are exempt from ACA penalties. Members of these plans share the same type of religious beliefs and agree to share medical expenses among themselves.

If you stay with a plan or have a plan you think will work, there are things you can do within the plan:

While large companies have significant power to negotiate, companies employing 50 to 99 employees have more negotiating power than they think. A good broker can shop around for you and also audit your group and plan for changes that could affect your rates positively, such as pointing out when a smoker has left the company.

A good plan should be designed to guide employees to the lowest-cost options first, such as choosing a general practitioner instead of a more expensive specialist.

With a high-deductible plan, the monthly premium is lower, but employees have to pay more costs out of pocket before the insurance company starts to pay its share.

A good wellness program can reduce rates and can involve incentives, such as lower premiums for healthier habits such as quitting smoking.

A health savings account allows employees to save money pre-tax, grow it tax free and spend it on qualified medical expenses. Employees who use their own money for health care often are more careful about their health care choices.

Implement a rule that states that spousal coverage will only be given to employees whose spouses do not qualify for coverage through their own employer.

One or more of these tactics could go a long way to lowering costs. Please contact us for more information